Ryssdal: So we just took this tour of which we are apparently one of dozens of groups who come through here during the week, what is it about this place that people want to come see how it is you guys do what you do?

Hsieh: For us our number one priority as a company is company culture, and our whole belief is that if we get the culture right then most of the other stuff like delivering great customer service or building a long-term enduring brand will just happen naturally on its own. It's one thing to read about our culture, and it's another thing for me to talk about it, but really the best way to get to know what it's like is to come and take a tour.

Ryssdal: Does it export...that culture, do you think?

Hsieh: We're not actually trying to export our culture or telling anyone else that their culture should be like ours. And in fact one of the points of the book that I wrote that just came out, "Delivering Happiness," is that they've done studies and what actually matters is that you have a strong culture and that you have values that you commit to, and as it turns out it actually doesn't matter what the values are. What matters is that you commit to them and the alignment that you get out of that. And that's the real power, and so part of what we're trying to show through the tours is that once everyone is on the same page, and you hire someone whose personal values match the corporate values, then you can feel the energy that comes out of that.

Ryssdal: It is worth a mention that when somebody started talking around here about corporate values and corporate culture, you were not the first guy to jump up and say, "Yes, let's do that." I mean you say it yourself in the book.

Hsieh: Yeah that's true and I think part of that is because so many corporations and companies have, they might call them values or guiding principles or so on, but the problem is usually they are very lofty sounding, and they kind of read like a press release that the marketing department put out. They sound the same as their competitors, and maybe you learn about it on day one of orientation, and it just becomes this meaningless plaque on the lobby wall, and so that was my personal resistance to it, and I think most other people's, and so we don't want to come up with something that was just a meaningless plaque. We wanted to come up with committable core values and by committable, meaning we are willing to hire or fire people based on them, independent of their job performance. And when you use that criteria, it's a pretty hard list to come up with. It took us a year to come up with it, and it wasn't just a group of senior executives that were spending a long weekend at an off-site coming up with something that sounded good. It was something that we really wanted to be able to walk the walk and be willing to hire and fire people based on it.

Ryssdal: So how did you come up with those? Did you solicit from the group?

Hsieh: Yes, so I sent an e-mail out to the entire company asking people what our values should be and got a whole bunch of different responses and we went back and forth for about a year and eventually came up with our list of ten core values.

Ryssdal: You famously do have ten of them from "do more with less" to "be a little bit weird" to "create a team environment and family spirit." Let me ask you this, though, if you had to pick one...if you had to, which one is The One?

Hsieh: It's really kind of hard to pick just one, I think that's like asking who your favorite child is, but I guess probably the one that's most relevant to business is about embracing and driving change. And there are so many examples of companies that have been around for a long time and then the world changes around them and they don't adapt to that because they've gotten used to how they've always done business and then eventually they become irrelevant, and so there's a quote by Darwin that says something along the lines of it's not the strongest or most intelligent of species that survives, it's the one that is most adaptable to change, and I think the same is true for business.

Ryssdal: You have also said, and you write in your book, that what this is really all about is happiness. You want people to be happy working here and as part of that, be happy in their own lives. How do you get there though?

Hsieh: I don't think there is a magical formula because if there was, then I think everyone would just be happy in the whole world. I think what was interesting for me is a lot of the stuff that actually leads people to be happier is actually counter-intuitive, and so I share kind of a Cliff's Notes version of some of the stuff that I thought was most interesting [in my book]. And what's interesting is that you can apply that to your business in making customers happy and employees happy as well. But one of the consistent things that has come out of the research on the science of happiness is that people are very bad at predicting what will make them happy on a long term sustainable basis. Most people think that Oh once I get "X" then I'll be happier. Once I achieve "X" then I'll be happy when the research shows that is just not true. There's studies of lottery winners, you look at their happiness level right before winning the lottery and then their happiness level a year later and it's the same or even lower a year later.

Ryssdal: So now I have to ask ... you're running a billion-dollar company, you've got a book on the New York Times best seller list, by all accounts incredibly successful ... are you happy?

Hsieh: Yeah, well it's one of those things where happiness is much more about progress than it is about achievement. So whether it's for me or for the company, are we continuing to make progress so yes, the answer is yes we've continued to make progress, and in terms of affecting more people and this idea of delivering happiness and helping other companies make their employees happier and their customers happier and we're making progress there. And then also from the financial side, we first hit a billion dollars in gross merchandise sales in 2008, and despite the economy we've continued to grow over the past 24 months and our Q-1 this year is up almost 50 percent in terms of net sales over the previous year, so that's progress. If our sales numbers were exactly the same as they are today ten years from now, then we probably wouldn't be as happy.

Ryssdal: So what I'm hearing you say is, "Yes, kind-of, I'm happy."

Hsieh: I'm saying that, it's not something that once you achieve it, then you automatically have it forever. It's not a destination, it's ongoing. The cliche is "it's the journey, not the destination." But it's actually, a better, more accurate way to phrase this is, "it's the progress, not the destination."

Ryssdal: About that issue of progress though, isn't it helpful if you want to make change to have a little bit of discontent, to have people not be satisfied and then act on that?

Hsieh: That's one way to do it and that goes back I think, to the difference between motivation and inspiration. So definitely you can motivate employees and lots of corporations and books and consultants talk about how to motivate employees. You can motivate them through incentives. You can motivate them through recognition. A lot of companies motivate employees through fear. But our belief is that there's a huge difference between motivation and inspiration, and if you can inspire employees through a higher purpose that has meaning to them and that they believe in and if you can inspire employees by creating an environment where the corporate core values match their own personal values, you can accomplish so much more than you otherwise would be able to and you don't really need to worry about the motivation part of it. Yes, being discontented can motivate someone but it doesn't really do much in terms of inspiring someone.

Ryssdal: I have to ask you the productivity question because we are here surrounded by people who are, many of whom are working, but there's another sizeable group that's standing around chit-chatting. There's a party down the hall that's been going on for an hour. How does all this affect actually day in and day out selling shoes?

Hsieh: Probably the easiest analogy or example to give is when we do new management orientations, we encourage new managers to spend ten to twenty percent of their time outside the office and so what you are seeing now, consider that outside...maybe away from their desk might be a better term. But a lot of that is actually outside the office, whether it's going bowling with your team or happy hour with the people you work with and so on. The initial reaction we get from new managers is that's great, sounds like fun, but there's a lot of work to do. What about productivity? And then we survey the managers that have done it [and ask] how much more productive and efficient is their team because there is higher levels of trust, communication is better, people are willing to do favors for each other because they are doing favors for friends not just coworkers. And the answers we get back range from 20 percent to even 100 percent more productive. So kind of a worse case scenario, you break even and you're having more fun doing it.

Ryssdal: You measure this by how quickly calls are picked up and how many more shoes you sell. I mean there are metrics, right?

Hsieh: Depends on the department. Different departments have different metrics, and some departments it's easier to measure than others. For example, within our merchandising team it's very easy to look at sales, markdowns, inventory levels, inventory turn and so on, but for other departments there may not be hard metrics that translate directly to the productivity of an employee.

Ryssdal: Can you have happiness without profits?

Hsieh: I'm sure there's plenty of people in the world that...the guy that's surfing all day, living on the beach probably doesn't have much profits but I'm assuming he's happy.

Ryssdal: Yeah but you're running a billion dollar company with two thousand people working for you. Can you have happiness unless you're making money?

Hsieh: Well the subtitle of the book is "The Path to Profits, Passion and Purpose," and really you need all three just to have -- and this is supported by some of the research that I talk about in the book -- but there's too many companies that focus only on the profit part of it and it actually ends up hurting their ability to earn long-term profits on a sustainable basis and continue to grow as a company. And what the research has found is that if you actually have all three, you have profits and you have passion and you have higher purpose in the company, that's what enables companies to really thrive in the long term.

Ryssdal: It's been a year or so since Amazon finished its deal with you guys. There was much consternation in the press and I imagine in the company about how that would change your culture. I would say that culture is probably intact, so let me ask you the counter-intuitive question. Have you guys changed to Amazon's culture at all?

Hsieh: I'll preface it with saying that Amazon is not trying to change our culture, and we're not trying to change Amazon's culture, but at the same time, both of us have a lot to learn from each other. And so the way we've structured it is we think of Amazon as this giant consulting company that has a lot of resources that we have access to, but it's up to us to tap into it as little or as much as we want to and we actually leave it up to each individual department or each sub-department to determine how much they want to do that. So some departments, they will have maybe a half hour phone call once a quarter to check in, and others for example, our warehouse operations, there's a lot to learn from each other because we approached our warehouse operations pretty differently in a lot of cases. So a lot of what we do has rubbed off onto Amazon and vice versa.

Ryssdal: You and Jeff Bezos, the CEO of Amazon, how are you influencing each other?

Hsieh: We actually probably aren't much. Basically from our point of view since the acquisition, it's as if we swapped out our previous board of directors with a new one. So instead of flying out to San Francisco once a quarter, we now fly to Seattle for the equivalent Board meeting. The meeting lasts two hours, so I get to see Jeff Bezos for two hours in a group setting once every three months.

Ryssdal: Is that enough for you?

Hsieh: I don't really know him that well, so I wouldn't mind spending more time with him. Regardless, even if I had nothing to do with Zappos, I think it would be interesting to learn a lot from him.

Ryssdal: So my wife was at Yahoo in 1998 and 1999, sort of the height of the craze at the dot com Internet thing.

Hsieh: What did she do?

Ryssdal: She worked on their web mail product. She was their Yahoo web mail manager for about two years. And so I spent a decent amount of time around their offices. And this vibe that you guys have here sort of smacks of what they had ten or eleven years ago. Where I'm going with this is that eventually Yahoo had to buckle down and become a serious company making serious decisions. Is this sustainable? Is this culture sustainable in a profit and loss world?

Hsieh: Well ultimately I think it comes down to I think you need to do it all. You can't just have employees having fun at the expense of profits, long-term profits and you can't do the reverse. You can't just focus on profits. And if you want to use Yahoo as an example; I don't know the specifics of their performance or what their growth has been like but I'm guessing that Google is probably doing better than they are.

Ryssdal: So the question is how is this sustainable? How do you do it? How do you keep this attitude and this mentality as you grow as it becomes a much more serious operation?

Hsieh: I think like anything else it needs to be managed and top of mind, so for us culture is the number one priority of the company and I actually don't know of any other companies that have said specifically that culture is the number one priority and actually put the actions behind it. There's a lot of companies that talk about culture being important, but it's not something that even is talked about at board meetings or at management meetings or when they look at the health of the company. Usually they just look at their KPIs or however they judge the health of the company is usually in terms of financials or other metrics, but you hardly ever see anything culture related, even if it's not a metric on that same dashboard or report.

Ryssdal: So does this work at a company like Goldman-Sachs?

Hsieh: I think so, I mean I don't know specifically about Goldman-Sachs, but what the research has shown is that what matters is the alignment that you get out of people that have strong values in where their personal values match their corporate values and so the specific environment here at Zappos probably would not be the right thing for Goldman-Sachs or for 99% of companies out there. But again we're not out there trying to say that other companies should try to adopt the Zappos values and culture. All we're trying to say is that they should have their own values and really commit to them in order to build their own strong culture that's right for them.

Ryssdal: It does seem here that what is being created here by virtue of your role in this company, and the book you've written and your public profile is sort of a two-headed operation. You have this web site that sells shoes and now clothing and cosmetics among other things, and you have you -- who has become an evangelist for this, who has written a book about it, who gives public appearances, who has people come to see him to consult with on core values and company culture. It does seem like that what Zappos has now is two product lines.

Hsieh: Well we actually have a separate entity called Zappos Insights, and actually that is what Zappos Insights is for. There's its own we site called ZapposInsights.com, and we help other companies develop their own values and figure out their own values and develop their own strong cultures. Because one of the reactions we get sometimes is, okay, glad you have this strong culture, Zappos. Happy for you, but this would never work in another industry, in a non-internet company and so on. But we host two-day seminars where companies from all over the country, world even, fly in and we go through that process with them and then they go back and implement changes. For example the Atlanta Refrigeration Company does refrigeration repairs out in the field, so in some ways you can't think of a more opposite company.

Ryssdal: They came here?...The Atlanta Refrigeration Company?

Hsieh: Right, they came here. A completely opposite company, and they went back after attending the Zappos Insight session and really focused on building strong company culture, really focused on delivering strong customer service and better customer experience to make their customers happier. And now they are reporting back that customers are happier, employees are happier, revenues are up and profits are up, and they sent up before and after pictures of their office environment. It's just really neat seeing that this type of philosophy of essentially using happiness as a business model working in other companies and other industries.

Ryssdal: Can you see a day when you say, alright, I've had enough of running this e-commerce company and I'm going to go spin off Zappos Insights and run that full time and export that?

Hsieh: For us we are not thinking of ourselves as an e-commerce company. Originally in 2003 we thought to ourselves, okay, let's build the brand to be about the very best customer service. And that's about making the customers happy, and then we decided culture is going to be our number one priority, and that's about making employees happy. And so over time, we keep expanding the vision, and so our vision and mission now is about delivering happiness to the world. And so, yes to our customers, to our employees, but now we are also spreading that to other companies. So it's not really about spinning off. It's just about expanding the business and adding more and more different businesses. So for example, Virgin is in music and airlines and so on, but it's all the Virgin brand, and so that's how we're thinking of for Zappos. Yes we'll have an e-commerce business selling shoes and clothing and other product categories on-line. We'll have the Zappos Insight business and there could be Zappos Airlines twenty or thirty years from now that's just about delivering the very best customer service and customer experience in the air.

Ryssdal: Will there come a day when you would be unhappy running this company? What might that be like?

Hsieh: I've learned that it's very hard to predict the future, so anything is possible. I guess it's possible that tomorrow some secret spy assassin decides to go after everyone at Amazon and some evil corporate people take over Amazon and they come in here and they break their promises because it's not the same people anymore. That might not be fun.

Ryssdal: So maybe.

Hsieh: Anything is possible.

Ryssdal: Anything is possible. You don't care much about shoes, you never cared much about shoes.

Hsieh: No.

Ryssdal: So why did you decide to run a shoe company?

Hsieh: Again it goes back to how we think of the company. We don't think of ourselves as a shoe company, and internally we say that we are a service company that just happens to sell shoes and clothing and now a bunch of other product lines. But for me, my passion is about customer service and company culture and that is really what Zappos is about.

Ryssdal: Why are you so focused on culture and service? Where did that come from?

Hsieh: Well the customer service part of it probably just comes from. I think we all, everyone including myself, just on a daily basis has interactions in the real world with bad customer service so it's probably more just out of annoyance than anything else. For company culture it was because of my previous company that I co-founded Link Exchange; this was back in 1996 and we ended up selling the company to Microsoft in 1998. The number one reason why we ended up selling the company was it just wasn't a fun place to work at anymore. We didn't know any better to pay attention to company culture, and I remember it was a lot of fun when it was just five or ten of us. By the time it got to 100 people, it just wasn't fun anymore, I dreaded getting out of bed in the morning and that is what really led us to sell the company.

Ryssdal: Where does Zappos go from here? You've talked about that a little bit but now what are you going to do?

Hsieh: For us in the short-term, we are making a big push into clothing. We started out in footwear, which we are doing about a billion dollars in gross sales every year now. In the U.S., apparel is about four times the size of the footwear market so in theory that should keep us busy until about five billion dollars in gross sales.

Ryssdal: It's clear sitting here talking to you is that you are not like most of the people that work for you. You are not an extroverted guy. You are not one of those jump up and down at the party and go downstairs and sing karaoke. How did this company flow out of your vision?

Hsieh: Here's an analogy...I think that a lot of other organizations, if you think of companies as...imagine this greenhouse and there are lots of plants and the leader is the tallest plant and the strongest plant that all the other plants aspire to be. That's a model that works at other organizations. For me personally, I think of myself less as trying to be that tall plant, strong plant that all the other plants aspire to be and more as the architect that designs the greenhouse that enables the plants to flourish and that enables them to become what was already within them. They just needed the right environment and conditions.

Ryssdal: So is all this publicity, this interview, and the book tour, and "Nightline" -- all the other media appearances and public speaking you've done, is that a little tricky? Is that a little difficult for you to get out there and do that?

Hsieh: Yeah, it's definitely not my preferred thing to be doing, and I'm actually not the only one. There's lots of other Zappos employees that go out there and do interviews and public speaking and so on. Whenever possible, I try to pass it off to another employee, but for some reason people want to talk to the title of CEO. That definitely is a challenge, and it also presents a scaling problem

Ryssdal: How so?

Hsieh: Well there's only one of me and I can't do every interview and be everywhere at once. And I think it's a problem that a celebrity like Madonna has. I think that a company that actually has figured it out, and I don't know whether accidentally or it was planned, is Blue Man Group, because you don't know if it's the same Blue Man or not. You can interview any Blue Man and so maybe that's a solution for us...we'll just all paint ourselves blue.

Ryssdal: You'll need Tony Hsieh masks, and you can all just go out and duplicate yourselves. You set out to create a company where culture was everything and core values were everything. Have you done that?

Hsieh: I think that there's always room for improvement. I definitely think that it's really great when the core values actually become the default way of thinking and it's integrated and become part of everyone's every day language. And it's stuff that we don't even notice anymore, and it's when outsiders come in and comment on it or how we act. If we weren't doing an interview, and I was just having an internal meeting here with other employees, all the stuff you pointed out we wouldn't have noticed, but obviously for you guys, you've noticed it because it's different. But for us, this is just how it is.

Ryssdal: Why and how are you growing in the recession, I mean this economy is still tough and yet you are up 50% from a year ago?

Hsieh: Well everyone knows that customer service is important, and nobody wants to work in a company that has a bad culture, so the question is why don't more companies focus on customer service or company culture. And I think the reason is the payoff is usually two or three years down the line, and most companies are focused on how to make the current quarter or the current year and don't really have the patience to make investments that are going to pay off two or three years down the line. If our only goal was to maximize 2010 year profits, the correct thing to do would be to stop answering our phones, fire everyone in our call center, and I don't really think that would effect our top line at all, but it would definitely effect our profits for 2010 but then we would start hurting as word got out about it two or three years from now.

Ryssdal: At one point in fact, you consider outsourcing your call center and you did outsource some of your logistics operations. Why have you brought everything back in house? Why haven't you taken the most profitable approach?

Hsieh: For us we realized that if we are going to build our brand to be about the very best customer service and customer experience, then we needed to control the fulfillment, we needed to control the call center. And no one is going to be as passionate about our customers as we are ourselves. It made sense to bring it back in. And your question about profitability, it's really just a question about long term versus short term profitability. We definitely believe that by bringing it in house, yes it's going to be less profitable in the short term, but definitely more profitable in the long term over time.

Ryssdal: Another core value question since that is in large part what this company is built on. I'm thinking core value number three here. It's, "Create fun and a little bit of weirdness." So what's the weirdest thing you did today?

Hsieh: The weirdest thing I did today...well right before you guys showed up, you see all these conference rooms over here, they are decorated by our employees. There was a photo shoot for something, I actually can't remember what. One of the photos they had they chose a random person who we happened to, by coincidence, be friends, and we've hung out outside the office. They had him sit and I was polishing his shoes, and they wanted that for the photo. And they wanted me to swipe the very bristly brush back and forth, and he wasn't wearing socks. So I think I gave him a rash during the whole thing. Most photographers want you to do multiple takes, and so it was a little awkward rubbing back and forth and giving him a rash on his leg.

Ryssdal: It's a study in contrast actually sitting here talking to you because having read the book, I know you are a guy who likes to go out and have a gin and tonic and get some drinks. You used to go to a lot of raves, you had a place in San Francisco, and you bought a building and you set up the top floor and turned it into party headquarters. And yet here you are...quite possibly the most soft spoken CEO and not self aggrandizing CEO we've ever had on this broadcast. It's little bit cognitively dissonant.

Hsieh: I've received that feedback before.

Ryssdal: And especially in this company. I don't think there are two introverts in this whole place.

Hsieh: Well I'm definitely at least 50 percent of that.

Ryssdal: You're one of them.

Hsieh: I'm definitely introverted by nature, so yes stuff like doing these interviews or public speaking is not something that comes naturally or instinctually for me.

Ryssdal: Is there a limit to good customer service?

Hsieh: In terms of what is financially feasible?

Ryssdal: Well I mean, the record for a customer service call in this place, just set not too long ago, I can see it over there somewhere...is just over seven hours and forty-something minutes, right? I mean that doesn't seem like a very effective use of labor

Hsieh: I guess that depends on what lens that you look through for that because I'm sure probably for that one phone call, that one transaction, that doesn't make sense, but you're not the first person that has remarked on that stat, and that story has been told over and over again. It's hard to assign metrics to what actual additional publicity or customers we've gotten because of that story being told.

Ryssdal: Fair point

Hsieh: Our goal is to have more and more authentic stories be passed along, and we've grown mostly by word of mouth, and that's just another example of word of mouth

Ryssdal: Without looking can you tell me what kind of shoes you're wearing right now?

Hsieh: Well yes because I only have one pair of dress shoes. they're Donald Pliner.

Ryssdal: Tony Hsieh, CEO of Zappos. Thanks a lot.

Hsieh: Thanks for having me.

About the author

Kai Ryssdal is the host and senior editor of Marketplace, the most widely heard program on business and the economy in the country.